Your Finances: Reinstated provision lets you donate from IRA

Sunday

Jan 20, 2013 at 2:00 AM

One aspect of the American Taxpayer Relief act of 2012 reinstates the charitable contributions provision regarding Individual Retirement Accounts that had expired at the end of 2011. This provision pertains to individual IRA holders, age 70½ or older, who are subject to required minimum distributions.

Laura Medigovich

One aspect of the American Taxpayer Relief act of 2012 reinstates the charitable contributions provision regarding Individual Retirement Accounts that had expired at the end of 2011. This provision pertains to individual IRA holders, age 70½ or older, who are subject to required minimum distributions.

This provision allows you to make a contribution to a qualified charity directly from your IRA, instead of taking your required minimum distribution. You are allowed to contribute up to $100,000 a year from your IRA to a charity. The advantage of contributing directly to a charity from your IRA is you no longer receive the required minimum distribution yourself, so you do not have to pay tax on the distribution. The trade-off is you do not get to claim the charitable contribution as a deduction on your taxes.

The reinstated provision is one of the portions of the tax act that is not permanent. Instead, this provision is good for the 2012 and 2013 tax years. Since the law was passed early in 2013, there is actually a reach-back provision until Jan. 31 of 2013. This reach-back provision allows you to make a distribution from your IRA before the end of this month and have it treated as if it was done in 2012. This means you could contribute up to a total of $200,000 this year by making one donation of $100,000 by the end of the month, and another $100,000 later in the year.

Additionally, if you took a required minimum distribution from your IRA in December 2012, then you can treat that as a charitable distribution to the extent that the amount is transferred in cash after the distribution to a qualifying charity before Feb. 1, 2013.

If you are considering taking advantage of any aspect of this charitable donation provision, it is critical to discuss this with your tax adviser, because one of the subtle nuances of this provision is the specific types of charities that qualify for this tax treatment.

Obviously this provision does not apply to everyone. However, if you do not rely on distributions from your IRA to pay for your living expenses, because you have other sufficient assets, you cringe at having to pay taxes on your required minimum distributions and you tend to make donations to charities, then this provision may be worth exploring with your tax adviser.

Laura Medigovich is a certified financial planner and vice president for M&T Bank's Hudson Valley region. The views expressed by the author are her own and are not endorsed by M&T Bank, M&T Securities or their affiliates.